“Don’t let the breezy, irreverent style of this book fool you. It contains serious

advice on personal-finance decisions from budgeting and savings to spending and investing.” —Burton G. Malkiel,

author of A Random Walk Down Wall Street

Witty, entertaining, wise, and practical, Ramit Sethi is an irresistible force for learning how to master money with the least amount of effort. He ex-

plains how to automate your money flow— i.e., earn while sleeping. Why your new best friend should be named Roth—the IRA, that is. How to beat banks and credit cards at the fee game. How to negotiate for a raise. How to manage student loans. Why you can enjoy daily lattes or buy those Manolo Blahniks you adore if you practice conscious spending.

You don’t have to be perfect to be rich. Or the smartest person in the room. Or a type-A personality. Just do 85 percent of what Sethi says, and then get on with your life.

Workman Publishing, New Yorkwww.workman.com

isbn 978-0-7611-4748-0 • $13.95 U.s.

bookland ean

in Week 1, you’ll optimize your credit cards and learn exactly what to say to get fees waived.

in Week 2, you’ll set up no-fee, high-interest bank accounts that won’t gouge you for every penny.

in Week 3, you’ll open investment accounts (even if you only have $50 to start).

in Week 4, you’ll figure out how much you’re spending. And then you’ll learn how to make your money go where you want it to go.

in Week 5, you’ll automate your new infrastructure to make your accounts play together nicely.

in Week 6, you’ll learn why investing isn’t the same as picking stocks—and how you can get the most out of the market with very little work.

Six Weeks to Financial Literacy

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RaMit Sethi is the founder and writer of iwillteachyoutoberich.com, which hosts over 200,000 readers every month. He is a recent graduate of Stanford University and a co-founder of PBwiki, an online collaboration company. He lives in San Francisco, and can be reached at ramit@iwillteachyoutoberich.com.

I WIll TEAch You To BE

by

RAmIT SEThIfounder and writer of

iwillteachyoutoberich.com

“A unique voice on money, one singularly attuned to…his generation.” —San FranciSco chronicle

Visit

iwillteachyoutoberich.com

for daily tactical tips, bonus

downloads, and interactive spreadsheets

No Guilt. No Excuses. No B.S.Just a 6-Week Program That Works

I WIll TEAch You To BE RIch

SEThI

165

INVESTING ISN’T ONLY FOR RICH PEOPLE

More Convenience or More Control: You Choose

I want investing to be as painless as possible for you, so here’s what

I’m going to do: I’ll give you an easy version and a more advanced

version. If you’re the kind of person who wants your money to grow

with the least possible effort on your part and you don’t care about all the

theory, turn to page 180. There you’ll find a step-by-step guide for picking

a single investment—a lifecycle fund—and you’ll get started investing in

just a few hours.

But if you’re a Type A nerd like me who wants to learn how it works—

and maybe even customize your own portfolio for more control—read on.

I’ll walk you through the building blocks of a portfolio, and I’ll help you

construct a portfolio that’s both aggressive and balanced.

Investing Is Not about picking Stocks

R eally, it’s not. Ask your friends what they think investing means

and I bet they’ll say, “Picking stocks.” Guys, you cannot reliably

pick stocks that will outperform the market over the long term. It’s

way too easy to make mistakes such as being overconfident about choices

or panicking when your investments drop even a little. As we saw in

Chapter 6, even experts can’t guess what will happen to the stock market.

Because they’ve heard it repeatedly from the many investment magazines

and TV shows, people think that investing is about picking winning stocks

and that anyone can be successful. They can’t. I hate to say it, but not

everyone is a winner. In fact, most of these so-called financial “experts”

are failures.

Actually, I don’t hate saying that. I’ll say that to their faces again and

again. Yeah, I’m a frail Indian man throwing verbal punches here on page

165 of a personal-finance book. This is how battles should be fought.

Anyway, the little-known but true fact is that the major predictor

of your portfolio’s volatility is not due, as most people think, to the

166

I Will Teach You to Be Rich

individual stocks you pick, but instead your mix of stocks and bonds. In

1986, researchers Gary Brinson, Randolph Hood, and Gilbert Beebower

published a study in the Financial Analysts Journal that rocked the

financial world. They demonstrated that more than 90 percent of your

portfolio’s volatility is a result of your asset allocation. I know asset

allocation sounds like a B.S. phrase—like mission statement and

strategic alliance. But it’s not. Asset allocation is your plan for investing,

the way you organize the investments in your portfolio between stocks,

bonds, and cash. In other words, by diversifying your investments across

different asset classes (like stocks and bonds, or, better yet, stock

funds and bond funds), you could control the risk in your portfolio—and

therefore control how much money, on average, you’d lose due to

volatility. It turns out that the amounts you buy—whether it’s 100 percent

stocks or 90 percent stocks and 10 percent bonds—make a profound

difference on your returns. Later, other researchers tried to measure how

closely volatility and returns were correlated, but the answer ends up

being pretty complicated. Suffice it to say that asset allocation is the most

significant part of your portfolio that you can control.

Think about that remarkable fact: Your investment plan is more

important than your actual investments.

Take, for example, this book. If we apply the same principle here,

it means that the way I organized this book is more important than

any given word in it. That makes sense, right? Well, the same is true of

investing. If you allocate your money properly—for example, not all in

one stock, but spread out across different kinds of funds—you won’t have

to worry about a single stock possibly cutting your portfolio’s value in

half. Indeed, by diversifying your investments, you’ll make more money

as an individual investor. To know how to allocate your assets, you have

to know the basic options you have for investing, which is where we’re

headed next.

“Since you cannot successfully time the market or select individual

stocks, asset allocation should be the major focus of your

investment strategy, because it is the only factor affecting your

investment risk and return that you can control.”

—WILLIAm BERNSTEIN, The Four Pillars oF invesTing:

lessons For Building a Winning PorTFolio

Get the full

book at Amazon.com

About the book At last, for a generation that's materially ambitious yet financially clueless comes I Will Teach You To Be Rich, Ramit Sethi's 6-week personal finance program for 20-to-35-year-olds. A completely practical approach based around the four pillars of personal finance—banking, saving, budgeting, and investing—and the wealth-building ideas of personal entrepreneurship.